STR pay-off or keep going
We just purchased our 2nd STR and our 1st is a total cash cow. We have enough cash to pay off the mortgage on that 1st property and cash flow even more OR continue to invest that money into more of the same asset class, more STRs (we are getting better at scaling and managing but its still a grind). It's getting harder to get a good return in most markets- I run the numbers on properties daily, and will likely continue to be difficult in the coming years. In this scenario A) would you pay off your mortgage on the cash cow or B) be patient and continue to invest?
I welcome the conversation!
*these numbers do not include any repairs or supplies, which is roughly 10% each month
** I expect our 2nd property to cash flow between 2-4k a month once we fully get it going
Well while money is still cheap, I would keep going if that fits within your debt/risk tolerance. That is what I am doing. Money is going to get a lot more expensive as we move forward.
@Christina Hall given the highly inflationary environment, I would not pay off any debt. As strange as it sounds, low interest debt is an asset during times of high inflation. (You don't mention the interest rates, so I am assuming under 5%). Inflation came in at over 7% in the last year. The value of the dollar is degrading faster than interest you are paying.
Paying off the mortgage will increase cash flow, but you are buying cash flow. That means you are reducing your cash on cash return. You are better off taking that cash and investing it someplace else. That could be more short term rentals or even in the stock market. You could easily get 8% to well into double digit returns. So is it better to pay off a 4% loan and avoid 4% interest payment or invest that cash and get 8%+ return?
If the cash is just sitting in your bank account not earning interest, then maybe it is better to pay off the loan. Money needs to be working for it to multiply.
Congratulations on your success, but it looks to me you could amplify this and be doing even better. Good luck.
Thanks! @Joe Splitrock and @Ken BooneAgree with all
Interest rates on both properties are under 3% but the issue is most definitely cash sitting making no return vs finding a comparable return investment. I like stocks but I like real estate better. We want to keep investing in the same markets if possible, and finding a good return has been a bit of a challenge- been looking for a while. Will definitely give it more time and see what the Spring holds and hopefully we can find somewhere to park the cash and if not than paying off the 1 mortgage I think becomes more appealing :)
Quote from @Ken Boone:
Well while money is still cheap, I would keep going if that fits within your debt/risk tolerance. That is what I am doing. Money is going to get a lot more expensive as we move forward.
Agree and it already has. Someone told me they were quoted 4.5% for a 30 year investment loan this week. I did two cash out refinances on investment properties last year, 30 year fixed at 2.875. The payment impact is huge:
$100,000 at 4.5% is a $507 payment
$122,300 at 2.875% is a $507 payment
That is 22.3% more purchase power at 2.875% compared to 4.5%! Anyone with loans under 4% would be crazy to pay them off right now. Rates are likely to move up even further this year. The question is what effect will this have on property values and rent rates? If demand stays strong, they could keep going up. If demand weakens, we could see days on market increase and rents slow down.
Quote from @Christina Hall:You would be absolutely insane to pay off those loans. I am not trying to be rude, just trying to save you from making a big mistake. Read my last post to understand. You will have no trouble getting better than 3% return. There are stocks that pay 5% dividend or just park your money in an S&P 500 index fund. You would even be better off just saving up and paying cash for your next property. Keep those amazing loans.
Thanks! @Joe Splitrock and @Ken BooneAgree with all
Interest rates on both properties are under 3% but the issue is most definitely cash sitting making no return vs finding a comparable return investment. I like stocks but I like real estate better. We want to keep investing in the same markets if possible, and finding a good return has been a bit of a challenge- been looking for a while. Will definitely give it more time and see what the Spring holds and hopefully we can find somewhere to park the cash and if not than paying off the 1 mortgage I think becomes more appealing :)
First off, what an awesome problem to have! I would respectfully disagree with the other commenters about paying off your mortgage being a huge mistake. I don't know too many people who went bankrupt owning free and clear properties that cashflow like crazy. In my opinion, either option is a good decision. I was listening to podcast the other day with Gary Keller and Morgan Housel and one of the things they talked about was that creating wealth and keeping wealth are two different skillsets and both are equally important. I see paying off the mortgage as more of a wealth keeping play, where continuing to scale is wealth creation. Again, don't see anything fundamentally wrong with either.
For me personally, I'd probably reinvest. It just fits better with my long-term goals now. I think the only reason I'd pay off the mortgage is if I needed to replace my W2 very soon. I'd also consider how much wealth I want tied up in one asset as well. I'd consider how stable the STR regulations are in the area where this property is and seriously consider what would happen to your goals if regulations changed and cut your cashflow. I'd also probably consider looking at other markets. It sucks having to build a new team, but something to consider if you can't meet your goals where you're at.
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Reinvest that money instead of paying down a low interest rate loan.
@Mathias Simmons great insight! I feel like goal wise wealth creation is the primary driver … we just started gaining momentum. However the thought of starting new in a different market makes me reconsider. But may be a necessity for sure eg: for wealth creation
Definitely going to give it a little more time to see how things play out in the markets we are currently in. The markets as a whole for STRs concern me so I see value in reducing risk by paying off the mortgage but more value in continued investment as even if market demand/competition declines wed still be able to cash flow without paying off the debt. Definitely a good problem to have:)
What @John Underwood said.
Christina,
Here is my take and my 3 year plan. Between the two STRs you own, you have enough cash flow to be financially free. However, managing STR is not passive. You can use the accumulated cash to purchase few of long term rentals - 15-30 unit apartments. These will be much more passive with the property manager managing the apartments. Thus you have two income streams from two different asset class and also you are minimizing your risks.